The rational approach to keeping New Year's resolutions

When pondering life's great decisions, including what New Year's resolutions to make, I like to ask myself: what would homo economicus do?

You see, Economic Man is great at decision making. Being perfectly rational, he meticulously and successfully sets about weighing the relative costs and benefits of different actions to arrive at a maximum point of well being.

Illustration: Simon Letch

He's also a myth. Economists have, for the most part, finally conceded this.

While real humans share many of Economic Man's impulses to selfish, pleasure-seeking behaviour, we fall short when it comes to being rational.

Unlike Economic Man, we struggle daily with mutually inconsistent desires, a lack of willpower and a lack of information about how to best achieve our goals.

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We want ice cream AND to be skinny – often unable to consciously admit that the two may be mutually exclusive.

Economic Man, by contrast, intimately knows and can weigh his relative preferences for gluttony and vanity, carefully selecting the intersection of actions that will maximise his potential enjoyment of ice cream, while minimising his discomfort from being overweight.

He's the guy who only has three bites of dessert and then stops. Who does that?

But just because we are not all homo economicus, doesn't mean we couldn't all benefit from being a little more like him.

So as we embark on our annual ritual of making New Year's resolutions, I decided to contact some of my favourite economists for their advice.

A professor of economics at the University of Technology of Sydney, Gordon Menzies, says resolutions are like promises, and Economic Man does not make promises, not to himself, and not to others.

"Basic economic theory uses Economic Man, a creation of John Stuart Mill, who was interested in what would society look like if everyone was motivated solely by greed, laziness and impatience. Notice the list doesn't include being motivated by keeping one's word."

"Mill's sub-human creations do not make promises about anything, and if they do you wouldn't trust them, since at every point in time they only do what is best for them. A New Year's resolution is effectively a promise to oneself, so, no, basic economic theory doesn't help you make it, or any other promise."

Despite this, Menzies – and most economists – support the idea of making New Year's resolutions.

Professor John Quiggin at the University of Queensland says many people should make resolutions because they fall short of the rational ideal of "dynamic consistency".

"Economic theory shows that someone who satisfies the rationality condition of "dynamic consistency" will not need to make New Year resolutions, since they will always want to continue with the same plan. Extensive experience shows that most people aren't dynamically consistent. In particular, there's a lot of evidence that people are impatient with respect to the very near future (the next few days) but more patient over longer periods (say, the coming year). For such people, it can make sense to attempt to bind themselves in advance."

According to Justin Wolfers, a professor at The University of Michigan and visiting professor at The University of Sydney, New Year's resolutions can be a helpful vehicle to remind us to ignore "sunk costs" – things that have happened in the past shouldn't determine our future decision making.

"We rarely respect the irrelevance of sunk costs in our behaviour. The New Year is a clean slate. If my behaviour is history dependent (why not eat the chocolate cake if I'm already overweight?), then the clean slate allows my behaviour to escape past poor behaviour," says Wolfers.

So what tips does economics offer us about making effective resolutions?

Andrew Leigh, a federal Labor MP and former academic, says the best way to keep resolutions is to raise the cost of breaking them, and not just the financial cost.

Leigh is offering any Liberal Party members who want to quit smoking a way to set up donations to Leigh's campaign fund should they fail to keep their promise to quit.

Websites such as www.stickK.com offer a similar thing: allowing you to make a contract with your future self and set penalties – such as donations to causes you hate – in the event you break the contract.

Leigh also recommends making your resolutions as public as possible, by posting them to Facebook. You'll be embarrassed when you don't keep them, and this should motivate you.

But those looking to lose weight should avoid the temptation to rush out and get an expensive gym membership. "One famous study found gym-goers end up paying more if they sign up to an annual contract than if they pay the casual visit price. I'd wager that this goes double for people who join a gym on January 1. A better strategy might be to find a friend whose company you particularly enjoy, and arrange to exercise together."

Economist Saul Eslake cites the findings of a US study "The Fresh Start Effect: Temporal Landmarks Motivate Aspirational Behaviour", which finds New Year's resolutions are about setting new "mental accounting periods" to achieve our goals.

Those who struggle with the idea of a year-long commitment could focus on one month instead.

ANZ economist, Cherelle Murphy, advises to pick just one resolution to maximise the chances of achieving it. "The willpower needed to complete New Year's resolutions successfully should be seen as a finite resource. Therefore use it wisely and productively to get the best results," she says.

"There can be the best laid plans but something always can come from left field to prevent or delay the meeting of the goal. So have a goal, but be flexible. The journey can be as important as the destination," he says.

As for me, I'm going to take a leaf out of homo economicus' book and focus on making good decisions to maximise my happiness, every day of the year